At the beginning of each year it seems there is no shortage of financial media stories talking about how the coming year will be a good one for stock pickers. Trouble is, it hasn’t worked out that way at least 70% of the time in the past 10 years.
Why should 2015 be any different?
If you think about it a moment, every year is “the best one” according to these so-called stock pickers because there is always a handful of active managers that beat their benchmark index in any given year. It’s just that most of them don’t beat their benchmarks.
In some managers’ minds, the only way to beat the market is to hold securities that are somewhat different than the index. However, the opposite is also true and much more common: The best way to lose to the market is to try to beat it.
Index vs. Active Management: A 10-Year Performance Comparison
But don’t take my word for it.
To see how index funds are doing compared to actively-managed funds, check out the numbers for yourself. To make things interesting (and a bit easier for research) I used the Vanguard 500 Index (VFINX), the Vanguard Mid-cap Index (VIMSX) and Vanguard Small-cap Index (NAESX) as respective proxies for large-cap, mid-cap and small-cap stock funds. All numbers are through Dec. 31, 2014:
- Large-cap: VFINX outperformed the large blend category in seven of the past 10 years. It beat 80% of category peers in 2014 and its 10-year annualized return beats 72% of the category.
- Mid-cap: VIMSX outperformed the mid-cap blend category in eight of the past 10 years. It beat 94% of category peers in 2014 and its 10-year annualized return beats 85% of the category.
- Small-cap: NAESX outperformed the small-cap blend category in 10 of the past 10 years. It beat 86% of category peers in 2014 and its 10-year annualized return beats 85% of funds in the category.
Need I say more? Not really, but I’ll add a few more comments for color.
No major market group has, on average, outperformed its respective benchmark index in the last 10 years. The case for active management doesn’t significantly improve with any group with the exception of large-cap stocks, where 50% of all large blend category funds outperformed the Vanguard 500 Index in 15-year annualized returns. But who wants to flip a coin on beating the market?
Rhyme and Reason: Active Management in 2015?
Yes, I know, past performance is no guarantee of future results. But I like another piece of wisdom from Mark Twain: “History does not repeat itself, but it does rhyme.”
Therefore, my prediction for 2015 is that actively-managed funds will definitely outperform index funds. But the follow-up question is: How many of the active managers will beat their benchmark? The rhyme of history says the winners will be in the minority.
As I concluded in my recent article, “If You Had to Invest in Just One Fund in 2015,” I’m going with the index funds in 2015.
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